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September 2009

The Financial Times has recently posted a few informative and anxiety-provoking articles about the US economy.

The first is about the degree of underemployment as gauged by food stamp applications, and notes that now 40% of applicants have some earned income. (“I’m sort of stunned, it seems like a dire warning . . . that even the jobs people are retaining in this recession aren’t at the wage level and hours level that they need to provide for their families,” said Heidi Shierholz, economist at the Economic Policy Institute.)

The second is about the financial capability of cities. ("For 2009, 88 per cent of city finance officers said their cities were less able to meet fiscal needs than in 2008 [up from 64% when asked last year]... Nine out of 10 predicted the situation would be worse in 2010.")

The data's important, because we need accurate status checks, but the anxiety and handwringing has everything to do with expectations. If we were on our way *up* we'd be in an entirely different mental space right now! We have a lot of resources: financial resources (still!), knowledge, skill, creativity, trust, love, health, beauty. We do need an accurate snapshot of what we have, but more importantly we need to know where we want to go, and going "to where we were before" cannot possibly be the right answer!

Here’s the secret – if you’re in a skid, whether understeer or oversteer, look where you want to go. Let me say that one more time, because it’s so important – look in the direction you want to go. Your hands will naturally turn that way too, and you’ll be doing the right thing.

I spoke with Britt Galler of Acre Gourmet, a "value-driven business" that integrates delicious, healthy food and environmentally friendly practices. Her focus is on seasonal, local, fresh produce and food cooked from scratch in order to maintain quality, and avoid processed ingredients. Her goal as caterer was to present a diversity of local products with options that were high protein, some dairy-free, some wheat-free.

Britt loved the energy at SoCap09, and was happy to see so many people eat so well and enjoy it so much! As she said, "It's nice to be a part of something so dynamic!"

Britt says she during catering engagements, she focuses on the quality
of flavors and an elegant but not pretentious presentation. However,
Acre Gourmet does a limited number of such engagements and is very
selective about the opportunities they choose -- they look to partner
with people of similar vision.

Not only for those people involved in fair trade and supply chain sourcing questions, but also simply for those who live in the San Francisco area, or come for extended visits, I did want to get into the details of the food supply chain.

I asked her about a favorite salad of mine. It turns out that it was based on a quinoa grain product, distributed by Alter Ego Fair Trade, an exhibitor at the conference.

The closing plenary on Day 2 was a panel moderated by Antony Bugg-Levine of the Rockefeller Foundation. Andrew Kassoy of B Lab, Brian Trelsted of Acumen Fund, and Chris Park of Deloitte talked about the state of standardization and why having a common set of standards is important to engaging in the market.

The sentiment was summarized, "What is it going to take for us to go from the promise of entrepreneurial energy to create a world we all want to see? Many of us are incredibly humbled by how much is left to do. What is it going to take so that we can be confident that we’re on track?"

Towards this end, a rating system, GIIRs was introduced as a top-level "quality of investment" summary metric, like "5 stars." It's built over the IRIS framework, which can be viewed and commented upon.

I am most interested in governance of the evolution of standards, and how one might be part of this process. As someone who has spent time within the technology industry, I'm familiar with how technologists do standardization. I'm eager to hear the developments pursuant to this paragraph, from the FAQ:

How will the taxonomy be updated and revised over time?

A governing body will be created that will oversee the evolution of
the IRIS taxonomy. This body will likely be housed at the Global Impact
Investing Network (GIIN) with one or two full time employees working to
establish a system that allows for the revision of the taxonomy over
time as comments and feedback are obtained from the broad stakeholder
universe.

After this morning's plenary panels, I was having this weird thought, triggered by something Charly Kleissner said (I don't recall specifically what, but I'm strongly aligned with his thinking): what if there's such a thing as too much liquidity? We're all taught about how important liquidity is in the function of financial markets, and how an illiquid market in particular will not allow prices to move to the "correct" place.

But we know that buying a house means people get off the couch and deal with community issues. We know that a 'transient' community often is less desireable in terms of safety, in perception if not also in fact. So why would we assume that equity investments in firm should be as liquid as possible?

What if we did something like utterly change the tax structure so that the longer you hold a trade, the less tax you pay? (And simultaneously limit the number of accounts - there's a compliance issue here, but that's resolvable.) Instead of paying longterm capital gains, you DON'T do any such thing; you pay a "flip tax" that gets increasingly steep the more frequently that you trade.

The logic? If people were incented to buy and hold, they would need to invest on the basis of long term value creation. The longer they hold, the more the idea "socially responsible" becomes a hard reality and not a "soft" term.

It's not as risky as it sounds, either. We do know that it's the creation and development of intangible assets that eventually leads to financially (and socially) productive ones. By expanding our understanding of those mechanisms, and tracking that information, the market could very simply be brought more inline with our values, incenting entrepreneurs and investors to make decisions with longterm social benefit.

It brings me to the other crazy idea: the issue was raised in the second panel this morning of what the new "social market" asset class will look like? I wonder if it would make sense to talk about an asset class specifically called "Intangible Assets" that are focused on the creation of one or more intangible assets? In this way we could begin talking about portfolio diversification and a blended approach fairly explicitly, compare returns in different economic environments, provide room for traditional and alternative investors to coexist and experiment, and examine the interaction among different intangible subclasses (How does air quality affect education returns? If you didn't already realize, asthma is a huge component of absenteeism.)

I'm at SoCap09. It's an event populated by people who are innovative, intellectual, bonded with other people and society, and -- to some degree -- idealistic. There are a lot of people here that are thought leaders and entrepreneurs.

So I suppose it's only natural to have many different visions being expressed. That's how entrepreneurs, policymakers, public speakers and corporate leaders communicate a cohesive plan, after all.

But there's a hazard that's easy for even The Economist to succumb to, which is talking about the space in "today's" terms: financial markets vs. social good. Either/or. Oil/water. One sector or another.

In the opening plenary, there seemed to be concern by some for-profit entrepreneurs in the audience that they were being overshadowed by non-profit ventures. While there have been many discussions and the closing plenary today based on a lot of deep thinking and objective research on how philanthropy and capitalism merge, I want to push into a level that's deeper, still. The points are straightforward:

(1) Creating something of value is an independent action, and doesn't have anything to do with what you exchange it for, or whether or not it's exhanged at all. In other words, if the tree falls in the forest and no one hears it, yes, there's still a sound.

(2) We need to ask: In our daily activities, what is it that we're creating that has value? Some people call those things "intangible assets," namely knowledge, relationships, processes, mental and physical health, etc. These are the "bricks" which allow us to build.

(3) The only difference between the financial sector and the "social" sector is what the end use those assets is, what we build with the bricks.

If all we measure in the financial sector is financial return, then the financial sector is almost invariably going to be a net brick user, which means the Return On Bricks is negative. (A typical exception to this happens when a lot of learning takes place through R&D, or a company creates a disruptive innovation that is socially beneficial). In contrast, the "social sector" strives to maximize its Return on Bricks, and doesn't spend a lot of time focused on the return on financial capital.

But in either case, everyone needs more bricks! So this dichotomy between the financial and the social sector is a veneer.

The longer we focus the conversation on what is the right mix of financial vs. social effort and try to fine-tune the return and outcomes, the longer we miss the truly gigantic wins that will come when we begin to measure and optimize Return On Bricks, regardless of what we're building. If we are to be a sustainable world -- and we can't exist indefinitely without at least understanding what we are doing "on speculation" -- we must focus our economic work on replenishing our bricks.